Ever since becoming responsible for my own finances, I’ve been subconsciously utilizing a variation of the following method of mental accounting. This excerpt is from the book Against the Gods, a book about risk analysis and management which we are reading for SRA311.
A professor of finance he knows has a clever strategy to help him deal with minor misfortunes. At the beginning of the year, the professor plans for a generous donation to his favorite charity. Anything untoward that happens in the course of the year–a speeding ticket, replacing a lost possession, an unwanted touch by an impecunious relative–is then charged to the charity account. The system makes the losses painless, because the charity does the paying. The charity receives whatever is left over in the account. (pp. 277-278)
Although personally my cushion against financial loss hasn’t been a potential charity donation, it is a great idea once I start making more money.
With this at least I now that I am not the only crazy one doing these trivial calculations in the back of my mind. What about you? Have you succumbed to mental accounting?
Read more about mental accounting in this amusing Washington Post article, though some of the examples of suspiciously identical to the ones presented in Against the Gods.
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